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ABSTRACT: Investment in construction project is able to give higher benefit beside of its high
uncertainty. The uncertainty depends on many risk factors. The influence of the identified risk then
has to be evaluated and calculated towards the project feasibility. Before investment, the feasibility of
the project has to be done that gives figures of cash flow on the following years. This can be one of the
considerations for making a decision whether this project is feasible or not. Risks that overshadow the
construction project have to be calculated as an influential factor towards the failure of a project. This
paper aims to know the feasibility of project investment by calculating the risk factors and treatment.
Risk probability matrix is used to obtain the risk priority, which then continued with financial analysis
for the feasibility study and also sensitivity analysis. The study shows that the parameter investment
value will be increased when treatment is done on risk.
KEYWORDS: risk, feasibility study, sensitivity analysis
1
INTRODUCTION
Every construction project should give benefits for the investor. These benefits consist of profit,
business development, resources utilization, job opportunities, etc. Profits are achieved in long period
and should have an accurate investment forecast so the investors still have willingness to invest their
money. Effective and efficient use of land not only reduces the routine expenditures but also exchange
into income source.
Project feasibility study is used to get the alternatives of optimal land use that give the highest profits.
Feasibility study analysis also gives information about the value of investment and the benefits that
investors will get. Definite return of investment can be seen from feasibility study. Commonly, Net
Present Value (NPV), Internal Rate of Return (IRR) and Payback Period are value that used by
investor to consider this project is feasible or not.
According to the characteristic of construction industry, which has high uncertainty, so it will occur
many risks during construction phase and or operational building. Risks can influence the profit and it
will decrease the feasibility parameter until infeasible condition for investing the project. To those
assumption, risks should have been anticipated and calculate it into the feasibility analysis so the not
happening for risks will be the addition advantage for the investor.
This paper discusses risk analysis with the treatment in construction project feasibility study with the
case study of PT. Perusahaan Gas Negara (Persero) in Indonesia.
1 Graduate of Civil Engineering Department, University of Indonesia
2 Formerly a Master Degree student in Construction Management at University of Indonesia
3 Head of Civil Engineering and Environmental Department, University of Indonesia
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Project is a temporary work to produce a unique product whereas no exactly match among the projects
[1]. Construction project's cycle consist of three phase i.e. Feasibility, including the form of project,
feasibility study, etc.; Planning and Design, including base design, time and cost planning, contract
and work planning; Construction, including procurement, distribution, construction, installation and
testing; Turnover and start-up, including final instalment, operation and maintenance.
Investment in construction projects needs a big amount of money with high uncertainty. Even high
profits can be achieved but to reduce the uncertainty, it has to make the good forecast and feasibility
study. The efforts to reduce the uncertainty and increase the certainty of project successfulness is
depend on the plan. One of the most phases in planning is feasibility study that is the study of feasible
or not the project to be constructed with succeeds [2]. The plan needs not only uneasy efforts but also
cost in a not small amount. Decision, which is taken based on the planning, will reduce risks that will
be faced. The risks can make project into failed even in the construction, operation or marketing of the
building. In the project cycle, the biggest opportunity to reduce total cost of project is in the planning
and feasibility study phase [3].
Some aspects that is examined in the phase of feasibility study are [3]: Market aspect, learn about
demand, supply and prices; technical aspect, discuss the direct relation with operational effort, such as
production capacity, technology that is used, production scale, process, location, etc.; management
aspect, learn thinks which have relation with the management of the project; financial aspect, discuss
about cash flow, money sources and financial projection even input or output.
A risk is such condition where exist possibilities of bad deviation from the wanted or expected result
[4]. A risk will be influencing when it produce a change to the result and have a possibilities to
happen. Risk management is done to manage risk so that the main goal of the project can be achieved.
There are some phase to be done in risk management that is: risk identification to search and find out a
type of risk that could be happen; risk evaluation to the identified risks so it can be known the impact
of risks; risk allocation to determine who will be took the responsibility of possible risks that could be
happen; risk mitigation is used to transform risks to other parties that could not be take by ourselves.
Feasibility study analysis calculates risks in construction projects and the risk variables refer to the
research of Donald H. Anakotta [5]. The risk variables include 8 aspect of investment feasibility that is
consist of marketing aspect, technical and technological aspect, political aspect, regulation and policy
aspect, social and cultural aspect, environment and city planning aspect, financial aspect, economical
aspect.
3
RESEARCH METHOD
Data needed for this research consist of impact and frequency of risks and also primary and secondary
data about policy of feasibility study. Method used for collecting data is by spreading questionnaires to
the experts in construction industry who have good knowledge and experience in risk management.
Risk judgements are given by respondents in the form of impacts and frequency of risks. The
judgement of impact shows level of risk variables will influence to the successfulness of project and
frequency shows possibilities to the risk occur. Risk variables that are used in this research can be seen
in Table 1.
Table 1. Construction investment risk variable
Code Description of construction investment risk variable
A. Marketing aspect
A.1
Decreasing in market demand to the type of property in surrounding location.
A.2
Oversupply for property now.
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147
Code
H.1
H.2
H.3
H.4
Risk probability matrix is used as initial analysis to clasified risk factors from the highest until the
lowest risk which called risk ranking. The function of risk ranking is to know that the highest risk have
to be given treatment first before the others.
The second analysis in this research is financial analysis. Financial analysis used to calculate
parameter values in order to know whether the investment is feasible or not. The values of this
parameter compared with the assumption and standard that we have to give recommendation to the
investment plan. Investment judgement can be done by several methods that are Net Present Value
(NPV), Internal Rate of Return, Payback Period, Average Rate of Return, Profitability Index and
Benefits of Costs Ratio [2].
In order to find out relation between calculation in feasibility study and investment parameter values is
used sensitivity analysis. From this analysis can be seen how much the changes in feasibility
parameter values due to the exchange of economic variables. The used of assumption in the
calculation is not always be exactly in the real world. Sensitivity analysis [6] is used to analyse what
will happened to the project if there are exchanged values that did not same like projection and
assumption.
4
RESEARCH RESULT
Risk probability matrix analysis uses risk variables judgment to determine the risk priority and
classifying risks. The process will find out risk that has the highest influences to the failed of project.
Level of risks classification divided into four level, that are E = Extreme, H = High, M = Moderate,
and L = Low. This classification can be obtained by dividing the difference of the highest and the
lowest risks by four.
The result of matrix shows 12 risk variables have Extreme level, 13 risk variables in high level, 18 risk
variables in moderate level and 10 risk variables in low level. The result also shows that the highest
risk variable is the increasing of loan interest rate. The important aspects from risk probability matrix
are Financial, Economical, Regulation and policy aspect. Risk variables in Extreme level can be seen
in Table 2.
Top ranks of risk variables have relation with economical aspect and financial aspect. This shows that
economics are easy to change and unpredictable so be an important aspect in project investment. The
changes of economics factors have a direct influence to the benefits that will be achieved by investors.
The examples are devaluation and inflation will cause the increasing of materials price and services
costs, increasing in interest rate and high overhead cost will cause increasing in expenditures that have
to pay by investors.
Analysis is done by determining the preliminary feasibility study before it is influenced by risks and
treatment (before process). Then, the study is done with calculating risk without treatment (in
process). Finally, the final feasibility study is analyzed by including treatment to the previous study
(after process). Risk variables which are calculated only its have the extreme level. This is done with
considered that extreme level have the highest influences to the project and able to represent the other
risk variables.
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Code
H.3
G.6
D.7
G.7
H.1
6
7
8
C.2
G.9
G.10
D.5
10
D.6
11
12
G.8
H.2
Risk variable
Currency devaluation.
Increasing in loan interest rate.
Policy in increasing of loan interest rate.
High overhead cost.
National economic growth doesn't match the
projection.
Leak of law enforcement.
Cancellation in giving loan.
Exceeded loan.
Complicated and difficult bereaucracy in giving
construction permission.
Complicated and difficult bereaucracy in giving
operational permission.
Exceeded investment in unappropriate time.
Uncontrolled inflation.
Impact
88,08%
76,16%
68,82%
68,82%
Frequency
46,84%
69,99%
66,70%
63,84%
Risk
74,33%
74,10%
68,11%
67,16%
64,24%
69,99%
66,16%
68,82%
64,24%
56,90%
54,78%
60,55%
69,99%
64,14%
63,01%
61,26%
61,47%
60,55%
61,17%
61,47%
60,55%
61,17%
61,47%
64,24%
60,55%
54,78%
61,17%
61,08%
Scenario
Before Process
In Process
After Process
NPV
190.372.382.052
85.986.702.273
151.110.904.586
IRR
21,34%
15,78%
19,33%
149
300,000
250,000
200,000
150,000
100,000
50,000
0
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
Percentage
Interest Rate
Inflation
Equity Percentage
Sales Percentage
Uncertainty of construction project can carry problems on the change of assumption value that is used
in study. Economic factors have close relation with investment parameters that can make the
significant changes of feasibility parameters.
5
CONCLUSIONS
Feasibility study analysis with calculating risk factors cause a decrease in investment feasibility
parameters and if treatments are done against the risks, hence the parameters will increase.
In this case study, risk factors give a significant influence to the investment plan of research object.
Risk factors that have the highest influence to the construction project are those that have relation with
economical and financial aspect. The economic factors that have high sensitivity of investment
feasibility are loan interest rate and increments of sales. Meanwhile, the factors that have low
sensitivity are inflation changes and equity percentage
6
REFERENCES
1. Project Management Institute. (2000). A Guide to the Project Management Body of knowledge
(PMBOK guide) 2000 Edition. Pennsylvania.
2. Husnan, Suad dan Suwarsono Muhammad. (2000). Studi Kelayakan Proyek. Yogyakarta, UPP
AMP YKPN.
3. Ary Maulana. (2004). Capital Investment Analysis Pada Commercial Building. Skripsi Program
Sarjana Teknik Sipil Departemen Teknik Sipil Universitas Indonesia.
4. Vaughan, Emmett J. (1996). Risk Management, New Jersey, John Wiley & Sons
5. Anakotta, Donald Harny. (2004) Project Finance Driven Feasibility Study Gedung Komersial
dalam Rangka Optimalisasi Pemanfaatan Lahan Melalui Kerjasama Investasi, Studi Kasus :
Financial Engineering. Tesis Program Studi Teknik Sipil Program Pasca Sarjana Universitas
Indonesia.
6. Blank, Leland and Anthony Tarquin. (2002) Engineering Economy Fifth Ed. New York, Mc.
Graw Hill.
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